Using Candles to Determine Strength of Price Action | Technically Speaking: Trading Stocks & Options
[Music] [Music] well good afternoon everyone i appreciate your patience as i had a little bit of a technical issue but it looks like we are all worked out welcome i'm happy you've joined me here today i want you to think about a question which is how much do you use candlesticks and in your technical analysis and how many of you like using them if you're pretty good at it hopefully i'll help expand your understanding of it today and if you're something maybe hasn't in the past hopefully you will receive some enlightenment so that you can start implementing some of the things that you see in candles as appropriate let's go through our disclosures real quick i have a an agenda and due to our technical issue i need to be on the ball i do want to thank barb armstrong who's in our chat she's going to help me out with questions that you might have and hopefully between the two of us we can answer those questions i want you to just note i'm on twitter i'm at chill underscore tda barb is at the armstrong underscore tda what we talk about today is intended for educational and informational purposes only not investment advice or recommendation of any security strategy or account type while this webcast discusses technical analysis other approaches including fundamental analysis may assert very different views past performance of any security or strategy does not guarantee future results for success all indus al investing involves risk including the risk of loss a stock market order will not guarantee an execution at or near the activation price once activated they compete with other incoming market orders the intent is to get you filled quickly but not at a particular guaranteed price now this will be our agenda today we're just going to take a real quick break or not quick break quick look at what the market's doing right now we're going to look at the s p we have several open positions that we need to look at we might not have time to do as many as i have scheduled and then i want to make sure we have some time for some new trade examples with an emphasis using candlesticks so let's hop over there over there means uh over to think or swim first of all very good so we have a little bit of a crooked thing there we go all right we've got the s p 500 you can see it was in a long channel for such a long period of time and i'm going to zoom in this portion of time here we had looking at the candles a really interesting price pattern we were seeing a really couple of steep flagpoles somebody that maybe wanted to have an enormous flagpole could have started back here maybe one that's a little bit shorter of a flagpole is back here and those of you that are just getting acquainted with flagpoles and flags a flagpole is a quick vertical move upward okay it and think about it as you fly your flag off your house it's a pretty steep incline right your flag doesn't fly like this it's going up and then the flag piece is the consolidation area and that consolidation can go kind of against the direction of your flagpole or it can just go flat it can be flat just like this here's the shorter flag pole here for those of you that can't really see that line because it's in my candles here uh one thing you should know is that when we see the major markets in this case the s p is a good gauge for the general market when we see the major markets creating a flag or a flagpole we're probably going to see a lot of that in the individual stocks that roll up into that index so in this case i would say we've got a flag a situation here that's flying what we call a stiff breeze because it's going out horizontal versus coming down a little bit diagonal we're going to still look for the same thing we're going to look for a breakout from it all right some people might have thought it broke out of the diagonal flag here but it really hasn't gone past this peak point here so that's why i would say hey it's still consolidating in a flag area all right so we're likely to see a lot of that with individual stocks all right that was our brief market update next item on our agenda is to uh evaluate and see where we are in some trades it's an important aspect for me to review things that we have done in the past because sometimes it's easy to get into a trade but it's a little bit harder to manage the trade and decide the decisions to make and when when you guys have responded to surveys one of the things you've said and told me is i find a lot of value when you review our old trades and so i'm going to make sure i continue to do that so first up on our agenda let's scroll this up a little bit better i have different areas of where i put our different trades and here's our class ones called trading stocks and options and we've got another section as well but most of them are in here first one i want to look at here are two credit spreads we put on last week one was nucor still and we're down a tabula we're down ten dollars we still have almost 30 days let's see how we're at 29 days right now so we still have time for the trade to work we don't need to be too nervous about it uh the other one is um apa which is right here again we got in it last week we're we're down a little bit we are down about 96 again not a huge deal we don't need to be concerned about it but let's go over and just take a quick peek at the chart so we'll start let's do a new core first and on new core i marked when we got in the our short leg that we want the stock to stay above at options expiration to create a scenario for us to get a max gain is a hundred and ten dollars so we had a little leeway when we got in at 110 and what has the stock done it's just mostly gone flat now it is up a little bit today with nice big bullish candle it's eclipsing the previous day's candle and so that might give a trader a little bit of positivity and optimism that that and now after the consolidation that maybe it's trying to break out and go a little bit higher again do we need to be overly worried about it no we're going to let the trade work we're going to let that time decay work in our favor because if it's just going to sit there and go sideways doesn't mean that it's going to be bad for our position it just means we might have to exercise a little bit more patience with it now we have apache and on apache our short leg well we got in here and it kind of went ever so slightly up yesterday i had a pretty decent day pulling down now just because it broke below support doesn't mean panic and here is our strike price here it's 27.50 on that green line today went a little bit below it but again is it time to panic no do we have 29 days for the trade to still work absolutely that's one of the virtues of doing spread trades is the stock doesn't have to go the direction you thought it would go immediately right it can go up like we expected to and it went up a little bit it can go sideways on this particular trade we're still above our short strike price it can go down a little bit like it did today looks like right now it's above the short strike price here of 27.50 it's when it dips down here and goes way below your short strike price and becomes an in the money option that's when we might say ah we need to maybe look at this at managing it a little bit different or seeing if we're still okay in the trade but both of these we're going to say let them continue to work one other stock we're going to look at here is fang uh it is not the fang stocks it's called diamondback energy on fang we got in let's see here let me back up we'll give ourselves a little bit more screen let's see if i didn't mark that let's see when we got in this was an older one okay it's off our chart here february 23rd we've been in this one for a long time uh we paid 70 and 30 cents we are now at 109.40 for whatever reason our stop loss is down here i think we've been moving it gradually gradually up in the trade now the question is do does it look to you like it's in a good spot it certainly is in a spot that if this were to break down below that support and that support looks really strong doesn't it we've got several candles just coming down to that point and stopping right buyers keep moving in uh when it gets down to that level of about 106 and change so some traders might look at this and say you know we do have a pretty decent gain on it uh maybe we might be seeing some potential cha topping out it's a little uncertain if that's really the case or not right now but some people may say well maybe this is a wide shoulder maybe this is a head because it rallied up a little bit higher and maybe we don't know for sure yet right maybe that's forming a second shoulder so is there reason to think maybe we should be a little bit defensive about locking in gains yeah that is conceivable now interestingly enough the neckline where the two dips come down to is pretty close to the same area and that's not always the case and it's right in line with our support area here so if somebody were looking at this and thinking hey things gonna reverse on us let's look for a bearish entry on it they would look for a break and a close below the neckline okay so something down in here so some people might say well let's let's do a little bit uh a closer look at our stop loss and see if it's at a good enough place now it's down here about just a little bit over a hundred dollars let's see what that is see if that'll balloon out for us okay it doesn't want to balloon out for us but it's in the hundred dollar area i want to take where our support line is where the neckline is and i want to go three percent below it some traders like to use three percent some might go two percent or five percent just really depends on the stock but let's see what three percent below that support area is so 106.49 times .97 is it the quickest
way to get three percent below that area looks like that's at 103.29 so 103.29 is going to be a little bit higher than where the stop is right now but still give the stock wiggle room if you're not comfortable with that do some other calculations or pick another number that you do feel comfortable with so what we're going to do we're just going to slide our stop loss up until it reaches this 103 29 area i'm going to click and drag you have to be uh somewhat proficient with your mouse to get it perfect i might not get a perfect uh we'll go six cents off of that but that's pretty close our stop is now moved up it just canceled our old stop loss and now if it breaks the neckline and starts going down it should come and hit our stop loss it's not guaranteed to fill it at that price but it'll trigger a market order market order says get me out of the next available point next available price and your the intent is to get us out of the trade quickly now if it what if it gaps down to 100 well if it gets down to 100 well it's below the stop loss it'll trigger that market order it says get me out and it'll probably be closer to maybe where it opened up that morning or opened up when the when the gap occurred if it dropped it through there it'll uh the intent is to get you in out or get you out fairly quickly might not be exactly the trigger price um just checking the chat here seeing if there are any questions i need to show you because they're more related to uh dylan says well what if we were to do a short vertical here on fame okay suppose you don't have a position this other one we had stock position for a long time definitely sitting at support some traders like to get in a short put vertical ass support sometimes they don't wait for a nice bounce entry now there could be some that say you know let's get above maybe the peak point of the shoulder here because we've been consolidating here the shoulder is not all that pronounced uh if indeed it is a shoulder we'll see if it really is at the end of this right so some might wait till it surpasses maybe that peak point there before initiating at that point they may feel like okay we've got a strong enough move off support but again some people like to take the entry right at support uh harman says ever consider a caller uh for this type of trade uh if there is reason to think that maybe the stock is in jeopardy like going to an earnings announcements uh waiting for an fda approval on a drug there can't be reasons why people if there's concern the stock may drop that some people might decide to put on a caller in this particular situation if you felt threatened by it certainly you could put on a collar usually it's used to protect pro protect when we have major or potential major moves down those of you that aren't sure what a caller is it's when we sell a call and buy a put both of those theoretically should profit if indeed the stock drops this case we're just trying to lock in some gains on the trade all right uh would not be nice to see sma values is what sam is saying or other technical indicators you know when we get to a traded two down the line i am going to put up some moving averages for us i wasn't going to do it quite yet let's do one more oh this this one i want to do here dash there's a reason i haven't put on any other indicators and that's because today we're really focusing on candles and i would rather have you focus on the candles that we're talking about other than focusing on well where's the stock in relationship to a moving average okay that's my rationale but if you want moving averages on there by all means have it on there now we traded this a little bit earlier we got in here was our inch our exit because it came back went low enough that it hit our stop in a previous trade what have we got going on with this one right now we've got a long call that was uh is dated out here in january so a couple of months away we still have 64 days in it look how long ago we got into the trade we got in september 9th this is one we were treating kind of like a stock because we bought an option a far distance out and one thing that people might do if they're trading an option a long option but kind of treating it like a stock as opposed to a swing trade and i say a stock meaning maybe that your intermediate trend trading right writing some of the peaks and the pullbacks as long as the trend goes up so here cost is 23.70 right now it's 26.62 it's gone up sun but not a ton we can see here calculation is it the trade overall we're up about 12 which isn't huge one thing that some traders like to do if they have this idea that maybe that the trend is going to continue but maybe their option gets too deep in the money to uh to keep its leverage they might want to roll it well when do people roll it sometimes some traders may pick a value here they may say you know any any delta above 75 or a delta above 80 or 85 that's a point when you stop losing your leverage on that option and and you might want to roll it out to a lower strike price sometimes out to a later dated month just depending on where we're sitting i want to put an alert on this so that we know when the delta gets to 80.
so i'm just going to do a right mouse click here on the delta here's our delta column 6810 and i would like to oh i can't do it off this screen i was thinking there was the do the delt off of here we're just going to have to go to the trade screen we're going to have to open up our january we're going to see our delta column right there there's our 0.68 so i'll try it from here instead we'll go right mouse click create alert so it's not going to be a price alert it's going to be a delta alert and so we're going to say okay if the delta gets out or above i'm going to say 0.80 okay gets to an 80 delta let us know about it send us an alert because maybe we want to go back and look at it and see if we want to roll it so we're going to go ahead we're going to create this alert i've got my alert set up to send me an email to send me a text if you're not sure how to do that come up here to your upper right hand corner where it says set up and then choose uh what does it say i'll have to go to it let me create the alert here set up application settings and then choose notification in the notification you can put in your email your your note your text if your phone number if you want to receive a text however you want those alerts to go off and it'll go off if i got my thinker swim open as well it'll go off in there all right now let's do this given that i had a little bit of a technical issue to get started here those are the ones we're going to review there are a few others we could review that but i think we've really touched on the bigger ones so now we want to get into the use of candles and how candles can be useful to you we're going to come over here to the chart and at this point i will put on a moving average one of the reviews i was going to put on our 520 crossovers that we're keeping track of uh in our case we've got a couple of trades girl going they the 5 hasn't crossed below the 10 yet okay or the 20 rather the 5 hasn't crossed below the 20 so both of them that we were going to look at we still would do have no action on yet because we haven't seen a crossover one of them is closed but it hasn't done it yet so we're sticking with our rules we're going to wait for that cross all right let's pull up here um i'm going to pull up the russell 2000 we're going to look at an index for a minute got too excited sticking a dollar sign in there when we see large tall candlesticks in your mind it should trigger whoa this is a powerful candle when we see little tiny candlesticks that should give us the idea that oh that candle is kind of weak it's not really giving us much information maybe the stock or the index whatever is in that small candle maybe it's um taking a little bit of pause in the price action kind of like what we saw with our trade earlier uh when we had the big flag showing out on that that one was um i can't remember which one that which stock that was in any case let's come over here and let's look at the russell 2000 for just a moment that might be a little too far to zoom in sorry let me resume here there we go we had the index in here in a little bit of a triangle do you see that top diagonal line there and the bottom support line here it was just kind of trading in that area and the candles were not very big so it gave us the idea not a lot of volatility not a lot of price activity until i mean there were some that were okay right these are actually not bad it should tell us the momentum is stronger there when we see a big strong candle breaking out of a price pattern that should be something to get our attention and then when we see something big like we saw this big candle here that was red it was like kind of like oh that's a big red bearish candle it completely dropped down below the previous candles body which was a little bit bearish and it started here and it dropped the whole day then the next day we saw almost the opposite we saw a big bullish candle pretty much about the same size as the red candle but a tiny bit higher i mean will we say tiny i mean if i go like that we can just see a little teeny smidgen up there but it gave us the idea that ow yesterday we thought bearish action was on the way now it looks like bullish action could be on the way right so anytime you see these big strong candles really tall know there's a lot of power behind them and then we take a candle like this one up here at the top this one some of you probably know what that is that's a potential reversal candle and it looks like it's a what we call a shooting star it's not a perfect shooting star but it is fairly close uh we have a trend that's going up we have a bullish candle like this green one here and then this one runs up it's kind of like it runs up high and it runs out of juice and it drops typically this candle we want it to gap up a little bit from the previous day's candle that's why i say this one isn't super perfect because it didn't really gap a lot in fact i think it only gapped a few cents okay but in analyzing markets and analyzing stocks keep those concepts in mind now if i were to come over here and pull up a one-day minute chart you could see some reaction to those candles or price maybe better way to say that not so much a reaction but we could see what the resulting price action is on some of these candles now i should ask you to close your eyes but i'm not going to i'm going to just start about here all right if you saw what's coming up it's okay uh we're just going to look at it here so we have some bullish activity and then what do we have we have flax right so we have kind of a bullish candle kind of a flat flag oh two decent candles and then we see a little bit of a flag here we see another break out of a flag pole and then we see one red candle that is within the body of the green candle it's not really strong inside the body or we would call it a dark cloud cover typically on a dark cloud cover we'd like to see it go at least into half the width or half the height of the previous candle and then following that we have this nice red candle here that actually almost is pretty close to this bullish candle and so between the two of these those two candles kind of eclipsed the previous day and then we might say okay maybe the bears are going to be in charge uh we get a red candle the next day and then if i just go over here day by day we can see oh another red candle do you still be short or are you long well here's some short-term support it looked like it went below the short-term support here right so perhaps we're still short have a bullish candle what's it doing maybe it's just doing a bear flag on us right drop drop drop side consolidation up drop some more so we had our side consolidation big couple of big red candles now these are one minute candle so they're not going to be incredibly huge most of the time but we're seeing that follow through the price action and really keying off of if we're seeing big candles at resistance big candles that support that can add more emphasis to these to the candle and the meaning of the candle now let's take a look here at let's go to a say a six month chart we're going to take a look at you uh i must have to uh let me fix this a little bit all right you i posted on this on my twitter account yesterday i said here's this stock actually was the day before yesterday here's the stock this is a nice long vertical rising flagpole right see these strong candles big tall green instead of tall dark and handsome they're tall green and beautiful all right letting us know hey there's some good momentum behind it so we had our flagpole and then it was making a little consolidating flag in here and what i posted i said this this stock has a 50-point flagpole now i went back and reviewed my math it's actually a 53-point flagpole is that a big deal well it could be a y because that's the expected move we might use as a target as this stock breaks out here so if i come over here and i duplicate the drawing and i grab it i put it on you can put it right where it breaks out if you want something more in conservative some traders will go down here it's where the bottom of the consolidation is today i'm going to use that methodology simply because a 53 point flagpole is enormous okay and i would like to be a little bit more conservative with it so we place it here and then what do we see we see uh the target at this point is up to about 235 right we're going to use our scratch pad here and we're going to type in our target equals 235 based on that now what about a stop you know on a stop what we would look for on a flag pattern and i do want you to know this is a pretty decent healthy candle today i mean it's it's almost a 12 candle but if the price of the stock dips back down into the flag consolidation area and i usually you know some people will use the bottom of it versus say the top of it if it gets kind of down here to the bottom of it then it gives you the idea of guess what flag pattern is not working that breakout is not solid okay so some traders will put their stop loss there now i'm going to see today where that might be i'm going to just kind of get my mouse there it looks like about 180 and a little bit of change let's go for 180 and 50 cents that's a pretty big range isn't it a target at 235 a stop at 180 50 and current price of the stock is at 204 so that's about a 24 25 point stop area and then of course we already know that we have about a 53 point target area of where we expect the stock to go we're going to do some trades with this one the with the idea being uh maybe it will be a short-term trade because we've got this target from the height of the flagpole that we're looking at let's see let me just take a quick look here at our questions dylan i i uh oh it wasn't yours where did it go now i lost it somebody said price is king i will i will agree with you price is king price action uh definitely is what we're keen off of now let's go to the trade tab it is a little bit of an expensive stock in our class we try not to risk more than 750 dollars got it right there in any single trade and so let's figure out what kind of a risk we may have here let's just do the stock to begin with we're actually going to do three trades on this one if we were going to buy the stock we already determined where our stock needs to go i should have said that equals the stop let's figure out our our risk per trade here that's going to be the difference between the price of the stock right now and where we put our stop loss so 204 35 is where we should be getting in roughly minus 180.5 is going to be our stop loss so that was pretty close to 24 that i was bald parking so 23.85 well how many shares could we get in this scenario we could say all right 750 is what we don't want to lose more than any trade whether it's an expensive stock or a cheaper stock it doesn't matter and then 23.85 that says 31 shares so we would not want to buy more than 31 shares so let's just go put that in uh let's do a right mouse click we're going to say buy custom with a stop oh actually we're going to go with a stop and a target so we're going to do the oco here uh that didn't do what i thought did i i might have clicked this wrong my custom it's the top one with oco brackets because i clicked on the wrong one all right so here's our current price we said hey this first one that's intended to be a target we want that to be 185 or i take that back uh 235 all right if you have decimals in there that's fine and our stop we're intending for that to go to 180.5
now we need to adjust our quantity here we're going to change this to 30. i'm going to click on that broken link and then it'll put 30 in here now some of you maybe aren't as familiar with think or swim and maybe you're still learning the ropes with it which is just fine don't be thrown off by the fact that we have three pink lines or three three selling lines for our stop we just need a little bit more space to get all the fields in there we're going to make it both of these good till canceled and that'll last us about six months hopefully it'll have hit our target or stop by then when it gets to 180 and 50 cents or lower that's when it triggers that market order that says get me out of the next available price it's not guaranteed to be 180 50. we're going to hit confirm and send and we are going to put this i want to put it in a special place here i want to put it in i'll just put it in our trading stocks and options so what i'm going to do with it we're going to hit send gonna send it on its way looks like we got filled what else would somebody consider doing here somebody might consider doing a swing trade maybe with an option with an option we don't know how long the move might take so we want to make sure we buy enough time to do that we're going to come in here we're going to use our open interest column and we're going to look for something that has maybe at least a 60 delta it doesn't have to be at least 60 in the scenario i'm presenting we're going to say yeah let's try to have a more conservative option as opposed to picking something out of the money let's do something in the money we're going to take this 195 strike and we're going to do we're just going to go ahead here we're going to say by custom with ocl bracket and how are we going to base this on we're still going to base it on the price of the stock and not the price of the option okay now if we could only buy 31 shares of stock that means we're probably going to be limited on our options here if we only want to risk 750 and this option which is quite expensive is 23. uh we'll want to have a stop loss in place on it uh but the main thing is that we're not going to load the boat we're not going to go well we did 300 we did 30 contracts we're going to say no the most we should do here is one so let's leave it here and then let's change these to both market orders and we're going to put conditions on when they should trigger the first one's still going to act like our target and let me make both of these good till canceled we always want those to be the same and let's go choose our target so we're going to click on the gear and then we're going to drag over this screen and we're going to say okay if and when the stock gets to a value of greater than or equal to we're going to change that look for the verbiage down there and then we're going to put in our price here our 235 price that we put as the target so we're going to trigger the option based on the stock price you don't have to do it that way but it is an option that thinkorswim gives you all right so we've got 235 we'll it'll trigger the market order we don't know what the price of the option would be at that point we got to make it good till cancelled we're going to hit save we're going to do the same thing down here for our stop again we're going to say it's going to act like our stop loss but it is a conditional order let's drag our order rules box over or we're looking for here we're looking for the price of the of the stock to be lower than 180 and 50 cents that's our stop price again we'll have it trigger a market order market order gets you out of the trade whatever the price is at that point and of course we're going to leave it good till cancelled again we never know when either one of these will trigger we do know the options of january option so it needs to when we want it to take such action before guess near options expiration date in fact the sooner it gets there the better it is for the trader let's go ahead uh let's hit confirm and send i'm going to send it to again our trading stocks and options group we're going to send this off expectation we get should get filled here we did we got even filled a little bit cheaper which was nice always works to your advantage if you can get it a little bit cheaper than the full rate now let me just check real quick um john futures and beyond was right before this class so at some point hopefully they'll have that recording up fairly soon but there isn't a link available to give to you at this point uh let's see here it's just some questions about when those are posted and classes are posted as soon as we can post them after a review all right barb i appreciate you sharing information and helping answer these questions now all of you are you feeling a little bit bit better about looking at candles and understanding is it a big candle with lots of momentum or is it a smaller candle that maybe is telling us it needs to take a breather sometimes it helps to have those formations like a flagpole and a flag to let us know okay yeah these little candlesticks are consolidating around there indicating low momentum at the moment all right we looked at our market we reviewed some of our open positions uh there's one other trade that i'm going to do after our class is over that will also be on you and i'm going to do a long call vertical all right so that's pretty much what we went through now i want you to practice using candles as you look at your charts and your positions your watch list and see if they can give you a little bit more comfort or give you an idea of what could happen next now they're not guaranteed nothing ever is but they can shed some light on what the likelihood could be and how strong the momentum is its big candle is strong small candle not so strong all right well i just want to remind you that what we talked about today was for educational and informational purposes only not investment advice or a recommendation of any security strategy or account type in order to demonstrate the functionality of the platform we need to use actual symbols however td ameritrade does not give recommendations or determine suitability of any security or strategy for individual traders so any investment decision you make in your self-directed account is your responsibility all right coming up next is going to be trading the trend mike fairborne is helping out uh james today so his class will start right at the top of the hour he would love to see you there i'm sure you would learn a lot we'll check back on these next week thank you for being here we'll see you then [Music] you